Review panel faces tough balancing act
The independent panel reviewing SA’s basket of zero-rated items has a seemingly impossible task. They have two months to balance the collection of revenue while mitigating its impact on the poor.
On April 1 value-added tax increased from 14% to 15%. The announcement in the Treasury’s 2018 budget attracted a backlash from civil society, political parties and trade unions, which called for a significant expansion of the list of zero-rated items.
In response, Finance Minister Nhlanhla Nene appointed a panel chaired by Ingrid Woolard, an economics professor at the University of Stellenbosch, aimed at mitigating the impact the VAT hike is expected to have on the poor.
The team met last week and discussed calls to zero-rate sanitary pads, condoms and soap — and strange requests to include champagne and crab meat on the list. The challenge is to make changes to the VAT-exempt basket without negatively impacting the country’s financial position.
“We know the consumption patterns. It’s not hard identifying which products are pro-poor, but the market structure is difficult when seeing if the benefit is passed on to the consumers,” Woolard says.
The first VAT hike in 25 years was introduced as a last resort to steady the weak fiscus and fund former president Jacob Zuma’s fee-free education swan song. It can bring in additional revenue of almost R23bn in 2018-19.
The panel made up of economists and academics includes Ayabonga Cawe, Ada Jansen, Thabi Leoka, Neva Makgetla, Lynn Moeng, Cecil Morden, Prenesh Ramphal and Imraan Valodia. It has until June 30 to submit its report to the Davis tax committee and Nene.
Despite the tight time frame, Woolard says it is manageable as a lot of research has already been done.
“The current VAT list hasn’t been looked at in 25 years. We may need a little more targeting in some categories. Should all vegetables be included? It’s a very tricky system.”
The panel’s mandate also includes removing items from the zero-rated list if they do not meet policy objectives, says Deloitte managing partner for tax and legal Nazrien Kader.
“All of the panel’s recommendations will have to be costed and the government will need to consider whether the recommendations are affordable. The more targeted the relief, the better,” she says.
Kader says they have to take into account, for example, the fact that different fruit and vegetables are consumed differently — while potatoes and carrots are staples, kale and honeydew melons are less accessible.
Cawe says the panel has to navigate a tight balancing act that may involve thinking differently. “There are limits, but that doesn’t stop us from putting out a somewhat helpful list.”
Director of the corporate strategy and industrial development research programme in the School of Economics and Business Sciences at Wits University Gilad Isaacs says that the list of zero-rated goods should be increased to include bread, poultry, flour, candles, soap, basic medicines, pay-as-you-go airtime and education-related goods. “While this will also benefit higher-income earners, the share of disposable income spent on these goods by the poor is higher,” he says.
Leoka says although there is a challenge that a longer list of exempt items might potentially diminish the amount paid in VAT, ordinary South Africans have a wish-list that needs to be taken into account.
While studies have found that the zero rating of some basic foodstuffs mitigates the impact of VAT on the poor, Norton Rose Fulbright tax consultant Belinda Sussman says that zero rating benefits the poor modestly in absolute rand terms but greatly benefits the rest of society.
In its interim report, the Katz commission found that of the total estimated revenue loss due to zero rating, little more than a third of the benefits went to households in the bottom half of the income distribution.
“This brings into question whether the poor would be better serviced by the elimination of the zero ratings if the additional revenue was spent to aid the poor through cash transfers to the poor or specific expenditure programmes,” says Sussman.
Research published in the Davis tax committee’s final VAT report shows the zero-rating of certain basic foodstuffs such as milk, fruit and vegetables is particularly skewed towards people who are not poor. The benefit of zero-rating basic foods such as rice, maize meal, samp, dried beans and paraffin is skewed towards poorer households.
THE CURRENT VAT LIST HASN’T BEEN LOOKED AT IN 25 YEARS. WE MAY NEED MORE TARGETING IN SOME CATEGORIES